Investing in real estate is commonly touted as a great way to become wealthy. And it is true that it has long been a road to financial success, remaining so even today. There are a number of benefits of investing in real estate over starting any other business.
1. The Relatively Low Risk
Real estate investing has a relatively low risk. The value of investment properties may decline over time if the neighborhood is going downhill, but you should be able to see that trend and sell the properties long before the home is worth half its prior value.
Stocks could lose 50% or 90% of their value overnight after key information is leaked to the public. Another great benefit is the protection insurance provides you.
If a retail business floods, you’re likely shut down until you can clean up, and even then, customers may not come back in time to generate enough cash flow to stay open.
About 40% of businesses don’t reopen after a disaster. If you own commercial real estate, the fact that one business closed doesn’t kill you. You simply rent out the building to a new tenant.
If residents move out of a property, there will be new tenants to move in once the rental property is cleaned up. Therefore, this type of investment is relatively safe as compared to other high-risk, high-return strategies.
If you invest in a startup business, you may not have any say in how the firm is run. If the business collapses, you have nothing. If you don’t like your property management company, you can switch.
If the tenants are not paying the rent, the courts side with you when you evict them for non-payment. Depending on how you write the lease, you can remove troublemakers rather quickly whether they’re generating constant calls to police or not maintaining you rental property.
2. Inflation Protection
Real Estate Investing by default provides significant protection from inflation. When inflation is at 10%, your property is worth 10% more at the end of the year. If you’ve structured your leases to index at the rate of inflation, you’ll be able to increase your cash flow at the rate of inflation. Compare that to losing money when bonds pay less than the rate of inflation.
3. The High Return on Investment
According to Investopedia, commercial rental real estate has averaged a 6% ROI in recent years while residential and diversified rental portfolios averaged 7.5% ROI. However, that’s an average that takes into account underperforming rental properties with high vacancy rates or a lot of non-paying tenants.
It is certainly possible to see 10% ROI on the purchase of investment properties year after year, not including the profit when the property is eventually sold.
4. You Make Money In Multiple Ways
Owners of rental properties receive rent from their tenants. They can see the benefits of investment property’s increased value when they sell it, something they could increase through careful management of tenants or thoughtful add-ons.
A less obvious benefit is the fact that they build equity with each mortgage payment. You might be able to offer the rental property to a variety of tenants, though your jurisdiction may limit renting the property out on vacation rental sites like AirBnB.
This may prevent you from earning a killing during tourist season or getting top dollar on a property close to major attractions. In other areas, you could rent it out this way for top dollar but become subject to occupancy taxes and additional regulatory oversight.
5. Significant Cash Flow
If you invest a sum of money in bonds, you’ll get perhaps a little more than the rate of inflation back. If you buy dividend paying stocks, you may or may not receive more money back than the rate of inflation.
Note that many stocks don’t pay dividends at all, and those that do may not pay much back. Instead, people hold it out of the hope they’ll be able to sell the stocks at a profit later. Conversely, rental properties generates significant cash flow monthly.
6. The Fact that Others Will Loan You Money to Do It – At Good Rates
Financial institutions see real estate investments as low risk. The mortgage rates for investment properties are lower than you’d pay for the mortgage on a personal residence. However, you’ll pay one to three percentage points more in interest for the rental property.
If you’d pay 4% for a personal mortgage, you’d pay 5% to 7% for the rental property. Conversely, the stricter loan-to-value ratio for rental properties means most people don’t have to pay mortgage insurance because they had to put 20% to 40% down.
If you want to invest in real estate with no money, you need to develop the ability to recognize, understand and even take advantage of other people’s money. You may still need some money for making a down payment, when opting for financing through conventional loans.
7. The Favorable Tax Treatment
You can deduct mortgage interest as a rental expense on your taxes. You can write off legitimate expenses for maintaining your investment property, and depreciation could significantly reduce the rental income you have to pay taxes on.
You can deduce management costs, cleaning, pest control and insurance costs. You will pay capital gains tax on the increased value of the property when you sell it.
8. The Diverse Strategies Available to You
Reality TV makes it seem like buying, renovating and selling residential real estate or “flipping” the properties is the most common method of making money with investment properties. This strategy is a viable one if you find the true deals, manage expenses and sell the investment property quickly for a profit.
However, one must be careful not to end up owning their job as a handyman, earning as much per year flipping houses as you could working for yourself without the risk of losing tens of thousands of dollars because you can’t sell the investment property for what you put into it.
Buy, hold and lease is a far more common money-making strategy in real estate investing. The investor may buy the property and have it fixed up, but they then rent it out to tenants and receive steady cash flow from the property.
Another strategy is buying a property someone else bought, fixed up and leased out. The new owner doesn’t have to search for a tenant, and the seller can sell the property to another investor for more with the tenant generating steady cash flow from the rental property than if they tried to sell it on the open market.
9. Real Estate Investment’s High Upside Potential
A piece of real estate can have significant upside potential. Commercial properties, for example, can be renovated and underutilized sections developed to generate far more cash flow than it was in the beginning.
Management changes like evicting those that don’t pay rent, improving the security of the building and little “best in class” features that don’t cost much but attract a higher class of tenant are ways to earn far more from a property than the prior owners.
This is true whether you’re talking about commercial or residential real estate. For example, you could renovate both a mother-in-law suite and main residence to create two rentable units.
You could also renovate the break area on the first floor of a commercial building, renting it out to a third party to sell concessions. Another option would be renting space in high traffic areas out to vending machine route owners.
10. The Opportunity to Minimize Costs
Owners of investment properties have a number of potential ways to minimize their costs. One is the triple net lease. The investment property owner still owns the building but doesn’t have to pay the mortgage, basic property insurance or property taxes for it.
The tenant receives a lower rental rate in exchange for taking on this burden. They may end up taking care of many small repairs in the property because it is to their benefit.
Property owners can also benefit from economies of scale, such as when they hire a property management company to manage all of their rental properties.